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The Influence of Financial Factors on Corporate Investment

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  • Karen Mills
  • Steven Morling
  • Warren Tease

Abstract

Recent theoretical developments have shown that cash flows and the structure of a firm's balance sheet may have an important influence on investment. Establishing a link between cash flows, leverage and investment provides insights into the way that monetary policy and cyclical factors more generally influence the corporate sector. If cash flows are an important determinant of investment then changes in monetary policy (by changing interest rates) will influence investment through a cash flow effect as well as through altering the rate at which the returns to investment are discounted. If this is the case, the higher leverage of the corporate sector implies, other things being equal, that monetary policy may have a larger impact on investment than in the past. In this article we use panel‐data analysis to examine the impact of financial factors on investment decisions of firms in the Australian corporate sector. We find strong support for the influence of financial factors on investment decisions. Leverage, internally generated cash flows, and the stock of cash and liquid financial assets are all important influences on investment behaviour, particularly for smaller firms, highly leveraged firms, and firms with high retention ratios.

Suggested Citation

  • Karen Mills & Steven Morling & Warren Tease, 1995. "The Influence of Financial Factors on Corporate Investment," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 28(2), pages 50-64, April.
    • Handle: RePEc:bla:ausecr:v:28:y:1995:i:2:p:50-64
    DOI: 10.1111/j.1467-8462.1995.tb00889.x
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    References listed on IDEAS

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    1. Geoffrey Shuetrim & Philip Lowe & Steve Morling, 1993. "The Determinants of Corporate Leverage: A Panel Data Analysis," RBA Research Discussion Papers rdp9313, Reserve Bank of Australia.
    2. Hoshi, Takeo & Kashyap, Anil K., 1990. "Evidence on q and investment for Japanese firms," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 371-400, December.
    3. Philip Lowe & Thomas Rohling, 1993. "Agency Costs, Balance Sheets and the Business Cycle," RBA Research Discussion Papers rdp9311, Reserve Bank of Australia.
    4. Stephen D. Oliner & Glenn D. Rudebusch, 1989. "Internal finance and investment: testing the role of asymmetric information and agency costs," Working Paper Series / Economic Activity Section 101, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

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    2. Andreas Stephan & Oleksandr Talavera, "undated". "Effects of macroeconomic uncertainty on leverage for US non-financial firms," German Stata Users' Group Meetings 2004 8, Stata Users Group.
    3. Basty Nadia, 2016. "Corporate Investment and Cash-Flow Sensitivity: Evidence from a Jasmin Revolution Period in Tunisian Market," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(11), pages 634-646, November.
    4. Chang, Xin & Tam, Lewis H.K. & Tan, Tek Jun & Wong, George, 2007. "The real impact of stock market mispricing -- Evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 15(4), pages 388-408, September.
    5. Gurmeet Singh Bhabra & Parvinder Kaur & Ahn Seoungpil, 2018. "Corporate governance and the sensitivity of investments to cash flows," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 367-396, June.
    6. Pankaj Sinha & Priya Sawaliya, 2021. "Financial Constraints, Stock Returns and R&D in Indian Stock Market," Vision, , vol. 25(2), pages 192-200, June.

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